Educational Articles

Coverage initiation: Orient-Express Hotels

Simon E. Shnayder
| May 30, 2011

Orient-Express Hotels (OEH) is a leading luxury hotel and travel company which currently has stakes in 50 properties across 24 countries worldwide, all of which it manages and either owns or co-owns. These consist of 41 highly distinctive deluxe hotels, the iconic ‘21’ Club in New York City, six tourist trains, and two river/canal cruise businesses. Furthermore, it engages in real estate development, primarily of properties adjacent to its hotels. The company’s predecessor began acquiring hotels in 1976 and organized Orient-Express in 1995. In 2000, the company went public. Its major competitors include Wyndham Worldwide (WYN), Marriott International (MAR), Choice Hotels International (CHH), Starwood Hotels and Resorts Worldwide (HOT), and Hyatt Hotels Corporation (H).

Operations

A hotel portfolio consisting of more than 3,500 individual guest rooms and multiple-room suites (each known as a “key”), accounted for 74% of the $571.9 million Orient-Express earned in revenue during 2010. Restaurant receipts provided 4% of total revenues, while the Tourist Trains and Cruises segment contributed 11% by selling travel tickets and food and beverage items. Finally, Real Estate and Property Development comprised 11% of revenues, mostly thanks to the sale of land and buildings. The company’s primary operating costs include labor, repairs and maintenance, energy and the costs of food and beverages sold to customers in respect of owned hotel operations, restaurants, tourist trains and cruises.

Orient-Express’ business strategy is unique in its pursuit of strictly high-end properties in areas of considerable cultural, historical, or recreational interest. Although this approach allows the company to charge relatively high average rates per room, it also leaves it vulnerable during more tumultuous economic times, when potential patrons often opt for cheaper lodging options. Nonetheless, the company’s geographic diversity leaves it somewhat insulated from isolated economic downturns.

Indeed, the company’s presence in emerging markets has proven a boon for revenues lately, as destinations in Brazilian and Asian/Pacific markets have been more popular than domestic ones since the end of the latest recession. Also, rising incomes and socioeconomic status in these regions could well lead to increased patronage of luxury hotels throughout Europe. Moreover, the company continues to look for attractive real estate and hotel investment opportunities in fast-growing underdeveloped markets.

Orient-Express has a decent financial structure, with long-term debt representing less than 40% of total capital. Moreover, with the cash raised through recent equity offerings (mentioned below), it has a net positive working capital position. However, with $143 million in current debt due, the company’s $132 million cash position may be depleted soon should it not begin to generate profits. This could lead to the necessity for further capital injections, which would not be good for the company’s balance sheet.

Performance and Investment Prospects

Beginning in 2008, Orient-Express, along with the hotel industry in general, experienced significant top- and bottom-line pressure brought on by the global economic downturn. As a result, its stock plummeted from more than $60 to less than $3 over the course of a few months. In order to maintain liquidity, the company issued several equity offerings throughout 2009 and 2010. Although revenues have since recovered considerably, the hotelier has been struggling to translate this into profit gains, due mostly to a higher cost structure associated with various asset impairments (concurrent with the property bust) and financing-related costs. Moreover, because the share count has more than doubled since 2008, share earnings have been elusive, as profits are divided among a greater number of shares. And although the share price has recovered somewhat from its 2009 low, it is still far removed from 2007 levels.

Despite continued demand recovery across all regions, the seasonally weak first quarter saw another share deficit. Still, the loss was narrower than the year-earlier figure, which is a promising sign. Moreover, revenue per available room (RevPAR) has been steadily increasing, mostly due to volume gains. All things considered, we think the chain could turn a small profit in 2011, and are cautiously optimistic about longer-term prospects.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.